Commissioner Of Income Tax vs M/S Samsung India Electronics ...
2011 Latest Caselaw 2099 Del

*      IN THE HIGH COURT OF DELHI AT NEW DELHI

+                      ITA No. 39/2010
                       ITA No. 40/2010
                       ITA No. 120/2010

%                                         Date of Order : 20.04.2011

COMMISSIONER OF INCOME TAX                               ... Appellant

                            Through:   Ms.   Suruchi  Aggarwal     and
                                       Ms. Shawana Bari, Advocates

                                 Versus


M/s SAMSUNG INDIA ELECTRONICS LTD.           ... Defendant
                  Through: Mr. Satyen Sethi and Mr. A.T.
                           Panda, Advocates.

CORAM:
HON'BLE MR. JUSTICE A.K.SIKRI
HON'BLE MR. JUSTICE M.L.MEHTA


1. Whether the Reporters of local papers               YES
   may be allowed to see the judgment?

2. To be referred to Reporter or not?                  YES

3. Whether the judgment should be                      YES
   reported in the Digest?

A.K. SIKRI, J. (Oral)

1. In these three appeals, though various questions of law are

proposed, when these appeals came up for preliminary

hearing on 11th January, 2011, notice was issued limited to

one question only, which is common to all these appeals and

reads as under:-

"A. Whether in the facts and circumstances of the present case, Ld. ITAT has erred in upholding the Order of CIT(A) in deleting the addition made by the A.O. under Section 40A(2)(b)."

It is for this reason that we have heard learned counsels for

the parties only on the aforesaid question of law.

2. The assessee is a company jointly promoted by Samsung

Electronics Company (SEC), Korea and its Indian associates.

M/s Samsung Electronics Company, Korea is a trans-national

or multinational company having its headquarters in Korea

which works and operates in several parts of the world. It is a

registered owner of the brand name and logo „Samsung‟ and

produces consumer durable and other white goods like

television, washing machine, refrigerator, etc., under the

brand name of „Samsung‟. SEC has 74% of equity in the

assessee company and remaining 26 % of the equity are held

and controlled by its Indian partner and associates. As per

agreements entered into between SEC, Korea and the

assessee, the SEC has granted a non-exclusive and non-

transferable license to the assessee to use the technical

information to produce the products at the facility of the

assessee company in India for sale in Indian as well as

international markets. The aforesaid rights were granted with

certain conditions and it is not necessary to set out the same

as far as these appeals are concerned.

3. We may, however, mention that apart from controlling stake

of 74% in the form of equity of the assessee, the SEC has also

obtained overriding and non-rectifiable rights to nominate 5

out of every 7 directors in the assessee company. In addition,

even the Managing Director to be appointed by the Board of

Directors in the assessee company is designated by SEC,

Korea. It is not in dispute that SEC, Korea, infact holds control

and supervision on the functioning of the assessee company.

4. For the manufacturing of various products, the assessee

company has been importing raw material from its parent

company, i.e., SEC, Korea. In the assessment year 2000-2001

such raw material which was imported was to the tune of

`131,27,62,956/-. Figures for other years are also of almost

same magnitude. Keeping in view the controlling hand of the

assessee company, the Assessing Officer was of the opinion

that SEC, Korea was a person specified under Section

40A(2)(b) of the Income Tax Act (hereinafter, referred to as

„the Act‟). Further he went into the issue as to whether the

price on which the raw material was imported was arm‟s

length price or it was an exclusive price paid by the assessee

to its parent company.

5. The Assessing Officer asked the assessee to justify the rights

on which various kinds of raw materials for production of

different goods were imported. The explanation of the

assessee company was that the raw materials were procured

from SEC, Korea because the same were the best possible

material available in the market and at the most competitive

rates. It was also submitted by the assessee that the prices

procured by it for importing of these very raw materials had

been accepted by the customs authorities after appropriate

verification. The assessee had even produced order, in

original, passed by the custom authorities satisfying itself that

the prices of various materials were at arm‟s length. It was

also explained by the assessee that the custom authorities

had infact referred the matter to Special Valuation Bench

(hereinafter, referred to „SVB‟) before accepting the

reasonableness of the prices declared by the assessee for the

import of the aforesaid raw materials. Additionally, it was

submitted that purchases from SEC, Korea had been made at

prices which were matching with the prices charged

universally.

6. The Assessing Officer was not satisfied with this explanation

rendered by the assessee. According to him, the claim of the

assessee was very general in nature and no documentary

evidence was produced to corroborate the same. The

Assessing Officer was of the view that it was a standard

practice used by multinational businesses to set up its

subsidiaries in the other countries with the intention of making

progress, and therefore, the prices on which the raw material

were supplied to the assessee must be exclusive. He, thus,

disallowed 2% of the aforesaid purchase price treating the

same to be exclusive and made addition to that extent in the

income of the assessee.

7. Feeling aggrieved by the aforesaid addition made by the

Assessing Officer, the assessee preferred an appeal before the

Commissioner of Income Tax (Appeals) [hereinafter, referred

to as „CIT(A)‟]. In these appeals, the assessee succeeded.

The CIT(A) held that there was no basis or justification for

invoking the provision of Section 40A(2) of the Act inasmuch

as the imports were made at a reasonable price and there was

no material before the Assessing Officer on the basis of which

he could confirm the opinion that the same were excessive.

The orders of the CIT(A) has been upheld by the Income Tax

Appellate Tribunal (hereinafter, referred to as „ITAT‟) which

has, by common order dated 17th April, 2009, dismissed the

appeals of the Revenue.

8. During the course of arguments, Mr. Satyen Sethi, learned

counsel for the assessee produced copies of three orders

before us, in original, passed by the Commissioner of Customs

(General). The first order is dated 13th April, 1998. It, inter

alia, accepts the same fact, namely, SEC, Korea is a holding

company of the assessee herein, and is following collaboration

for a setting of technical know-how and components of the

assessee company. For this reason, the case was taken as a

case of relationship under Rule 2(2) of the Customs Valuation

[Determination of Price of Imported Goods] Rules, 1988. A

detailed questionnaire was issued to the assessee and

provisional assessment of all Bills of Entry of the assessee was

ordered. The assessee had submitted the reply to the

questionnaire sent by the SVB. The reply of the assessee and

the material produced was examined by SVB. Commissioner

of Customs (General), thereafter, examined the issue in the

light of the said report and the explanation furnished by the

assessee. This order further reveals that the commissioner

formulated three points which were to be decided by him in

the said case. The first point was as to whether the apparent

relationship between SEC and the assessee has influenced the

invoice values being charged by SEC in respect of imports of

capital goods, CBUs and components. This point was

answered in negative holding that the declared price of the

imported components had not been affected by the said

relationship between the SEC and the assessee. The price, as

declared, was accordingly accepted at arm‟s length price and

the goods cleared after charging customs duty on the basis of

prices declared by the assessee in the import documents.

Other two orders, in original, passed by the office of the

Commissioner of Customs are dated 23rd March, 2001 and 23rd

January, 2003, where the conclusion arrived at is in identical

terms as contained in the order dated 13th April, 1998.

9. We may additionally observe that in the order, in original,

dated 23rd March, 2001, findings are recorded in respect of

different material/components imported, i.e., to say color

monitors of different dimensions and hard disk drive, etc. and

findings given in respect of all these materials is that the

prices at which the goods are imported are reasonable and

not excessive and the relationship of SEC, Korea with the

assessee has not influenced the said price. In view of the

aforesaid categorical findings by the custom authorities, after

getting the valuation done from its SVB, when this material

was produced before the Assessing Officer, the Assessing

Officer glossed over the same and only on the ground that

SEC, Korea was a parent company of the assessee herein and

was controlling the affairs of the assessee company presumed

that the prices at which the assessee imported the aforesaid

materials from the said parent company must be excessive

and unreasonable.

10. Apart from this presumption, based on the relationship

between the parent company and the assessee company,

there was no other material before the Assessing Officer to

come to such a conclusion. This would be clear from the

following observations of the Assessing Officer in the

impugned order.

"... in view of the standard practice, uses etc of multinational business activities and its very motive and purpose of the business whether in one country or in another as the case may be, it is considered that there is a case of making a disallowance u/s 40A(2)(b) of the IT Act, 1961. Since, Samsung Electronics Company, Korea is a

established and ongoing business enterprise, the normal presumption will be that it must have made a reasonable profit from its transactions to the assessee company. The representatives of the company were therefore asked to provide either the balance sheet and P & L A/c of the Samsung Electronics Company, Korea or the margin of profit in the hands of Samsung Electronics Company, Korea from the transaction with the assessee company to quantify the amount of disallowance u/s 40A(2)(b) of the IT Act, 1961 in a logical, fair and reasonable manner. However, the assessee company expressed its inability in providing this information on the plea that same was not available with it. The contention of the assessee may be correct, as it may not be in the possession of the information pertaining to Samsung Electronics Company, Korea. However, considering the close relationship between the assessee company and the Samsung Electronics Company, Korea and near complete conversion of their interests, same could not have been a difficult job had assessee company made serious attempt to obtain this information."

11. In the process, weighty and substantial submissions made by

the assessee before the Assessing Officer were totally ignored

and brushed aside. We may note in this behalf that the

assessee had specifically argued on the basis of material

produced that sales by the parent company to the assessee

made in various years of different items were more or less at

constant price and difference if any was mainly on account of

fluctuation in the rate of foreign exchange. It is discernable

from the order dated 24th November, 2003 passed by CIT(A) in

respect of assessment year 2000-01 that the assessee had

filed a comparative chart of the gross margin earned on such

trade.

12. The CIT(A) had also recorded the said finding of fact that the

prices were competitive in nature with respect to the other

suppliers of such components and there should not be any

allegation that higher price had been paid for such import. It

was also submitted by the assessee that assessee deals in

white goods, a sector in which there is huge competition and

therefore there could not have been a reason to over view the

components and raw materials as it would adversely affect

the business of the Assessee company. It was also submitted

that such an invoicing would have resulted in paying

substantial custom duty to the customs authority which was

much less than the rate of income tax and thus, such an

invoicing would have increased the liability of the assessee

and would have gone against the interest, not only of the

assessee company but the Korean company as well.

13. The aforesaid discussion would clearly demonstrate that the

two authorities below have arrived at a specific finding of fact

that the raw materials are imported by the assessee from SEC,

Korea at reasonable/competent rates which are neither

excessive nor unreasonable. Once such a finding is recorded,

which is a pure finding of fact, the question of applicability of

provision 40A(2)(b) would not arise at all. It is held by Apex

Court in Upper India Publishing House P. Ltd. v. CIT

(1979) 117 ITR 569 (SC) that such a finding is a finding of the

fact and in this backdrop the provision of Section 40A(2)(b)

cannot be invoked which becomes an academic question. The

brief order of the Supreme Court in the said case reads as

under:-

"There are two questions in respect of which a reference has been directed by the High Court on the application of the Revenue under Section 256(2) of the Income-tax Act 1961. So far as the first question is concerned, it is undoubtedly a question of law and could properly form the subject-matter of a reference but the second question as framed is clearly a question of fact and we fail to see how it could be directed to be referred by the High Court. The question whether a particular expenditure on rent is excessive and unreasonable or not is essentially a question of fact and does not involve any issue of law and hence we are of the view that the second question ought not to have been directed to be referred by the High Court. But if the second question could not form the subject-matter of a reference, then obviously the first question becomes academic, because Section 40A(2)(a) cannot have any application, unless it is first held that the expenditure on rent was excessive or unreasonable. We, accordingly, allow the appeal and set aside the order of reference made by the High Court. There will be no order as to costs of the appeal."

14. To the same effect is the judgment of this Court in the case of

Shriram Pistons and Rings Ltd. (1990) 181 ITR 230 Del.

15. Learned counsel for the appellant has strongly relied upon the

judgment of Madras High Court in CIT v. NEPC India Ltd.

(2008) 303 ITR 271 (Mad) to contend that onus would be upon

the assessee to place relevant material on record and to

demonstrate that the prices on which the goods were

imported were reasonable and not exclusive and in the instant

case this onus had not been discharged by the assessee. In

the first place such a condition is not permissible when it is

concluded by us that provision of Section 40A(2)(b) of the Act

are not applicable. That apart, the narration of facts stated

above, clearly, proves to be contrary and demonstrates that

the assessee had discharged the initial onus. The assessee

had shown that the purchase price had been more or less the

same in dollar terms in this and earlier years. The import of

goods was subject to levy of customs duty and the price

declared to the custom authorities had been accepted by

them, as noted above. By placing this material on record, the

assessee had discharged initial onus cast upon it. Thereafter,

the onus thus shifts on the department to demonstrate as to

how the price was excessive or unreasonable. In NEPC India

Ltd. (supra), the assessee had failed to discharge such an

initial onus otherwise the principal of law which was stated by

the Madras High Court in that case would hit the balance in

favour of the assessee herein when applied on the facts of this

case, as is clear from the following discussion therein:-

"8. Now, let us analyse the power and jurisdiction conferred on the Assessing Officer under Section 40A(2)(a) of the Act, which revolves on the discretion conferred on him in the context of "Assessing Officer is of opinion". The words "is of opinion" indicate that the opinion must be formed by the Assessing Officer and it is of course, implicit that the opinion must be an honest opinion, having been formed based on the circumstances available before him. In other words, what all, therefore, Section 40A(2)(a) of the Act contemplates is that there should be some material available before the Assessing Officer for invoking Section 40A(2)(a) of the Act to initiate action to disallow or refuse to deduct the excessive or unreasonable expenditure mentioned thereunder. But, at the same time, before taking any final decision by invoking the power under Section 40A(2)(a) of the Act, either allowing or disallowing such expenditure incurred as excessive or unreasonable, such decision of the Assessing Officer should be based on reasons well- founded, which are judiciously acceptable and in which event, the finding or decision arrived at stating that the expenditure is excessive or unreasonable and the same cannot be allowed or deducted, certainly would become purely a question of fact, which the Court cannot interfere, in view of the ratio laid down in Commissioner of Income Tax v. T.T. Krishnamachary & Co. [2002]256ITR82(Mad), whereunder it is held that the finding that the payment was not excessive,

as another party has also purchased at increased price, is one of the facts."

16. Therefore, even if we presume that section 40A(2)(b) is

attracted in the instant case, on the facts of this case still the

outcome has to be against the Revenue.

17. We, therefore, do not find any merit in this appeal and the

same is hereby dismissed.

A.K.SIKRI (JUDGE)

M.L.MEHTA (JUDGE) APRIL 20, 2011 AK